Differences Between Revocable and Irrevocable Trusts in Arizona

Trusts in Arizona can be revocable or irrevocable. While alive, you can amend or remove assets from a revocable trust. However, you must get a court order to alter or remove assets from an irrevocable trust. The type of trust that will meet your estate planning objectives may depend on whether you wish to retain control of the assets while alive, in addition to other factors.

Here, we discuss the differences between these two types of trusts. With more than 50 years of combined legal experience in many areas of the law, the experienced estate planning attorneys of Mushkatel, Gobbato & Kile, P.L.L.C., can advise you about both types of trusts and help you decide which is best for you.

What Is a Revocable Trust?

A revocable trust is a legal arrangement that allows you to manage assets during your lifetime and control how they are distributed after your death. Many people use this type of trust to avoid probate, streamline the transfer of their assets to their beneficiaries, and maintain privacy by avoiding public court proceedings.

The primary benefit of a revocable trust is its flexibility. As the grantor, you can modify or revoke it at any time as long as you are mentally competent.

A revocable trust offers distinct advantages. It allows you to serve as the trustee who manages the assets that you have placed into the trust. You can also name someone as a co-trustee. You can add or remove assets, change beneficiaries, or adjust the terms of the trust as your circumstances change.

After you pass away, the successor trustee you have named will manage the trust and distribute assets according to your wishes. A revocable trust provides peace of mind by allowing you to retain control while planning for the future.

However, revocable trusts can have some drawbacks. Unlike irrevocable trusts, assets in revocable trusts lack protection from creditors or lawsuits. They are not protected because the trust creator has control of the assets. If you face significant debts or legal claims, the assets in your revocable trust could be at risk.

What Is an Irrevocable Trust?

An irrevocable trust is a legal arrangement that allows you to transfer assets out of your control and place them into the trust. Someone else oversees the trust for the benefit of its beneficiaries. Generally, you cannot modify or revoke an irrevocable trust’s terms, making it a powerful tool for specific estate planning goals.

Many Arizona residents use this type of trust for tax benefits. It can reduce their estate taxes, protect assets from creditors, or protect their eligibility for government programs like Medicaid by removing assets from their taxable estates.

The trade-offs of an irrevocable trust stem primarily from its lack of flexibility. Because you relinquish control of the assets, they are not subject to lawsuits, bankruptcy claims, or estate taxes, making them ideal for preserving family wealth and protecting your beneficiaries.

Who Should Use a Revocable Trust?

A revocable trust might be right for people in the following situations:

• Parents of minor children — Parents can use a revocable trust to manage their children’s assets until they reach a certain age or milestone.
• People with blended families — A revocable trust can help people in blended families clearly outline how they want their assets divided to ensure children from previous relationships receive a portion of their estate.
• Arizona residents who own property in multiple states — A revocable trust can streamline the transfer of out-of-state property, helping  Arizona residents avoid the hassle of numerous probate processes.
• People concerned about incapacity — A revocable trust allows a successor trustee to manage the grantor’s finances and assets if incapacitated.
• Those seeking privacy — A revocable trust can help those who want to keep their estate plans private by keeping their financial affairs out of public probate records.
• Individuals with changing finances — A revocable trust offers the flexibility to make updates for people who anticipate acquiring new assets or experiencing sudden financial shifts.
• Retirees planning for the future — Retirees who want to simplify the distribution of their estate while reducing stress for their heirs can benefit from a revocable trust.
• Business owners and partners — A revocable trust can help owners or partners manage complex financial situations, including the business’s assets or ownership stakes while keeping those assets organized and secure.

Who Should Use an Irrevocable Trust?

An irrevocable trust may be suitable in the following situations:

• People with large estates — Individuals or families with significant assets can use an irrevocable trust to reduce estate taxes and protect their family wealth for future generations.
• People seeking asset protection — An irrevocable trust shields assets from creditors, lawsuits, and financial claims, making it ideal for people with liability concerns.
• People planning for Medicaid eligibility — Transferring assets into an irrevocable trust can help individuals meet Medicaid eligibility requirements for long-term care without depleting their resources.
• Business owners — Business owners can use an irrevocable trust to separate personal and business assets, which helps ensure the continuity of their company after their death.
• People looking to support charitable causes — Those who wish to leave a legacy through charitable giving can establish charitable trusts to support their preferred causes.
• Parents of children with special needs — An irrevocable trust can provide long-term financial security for these children without affecting their eligibility for government benefits.
• People with significant life insurance policies — Using an irrevocable life insurance trust (ILIT) can remove the policy’s value from a taxable estate, benefiting the grantor’s heirs.
• Families protecting generational wealth — An irrevocable trust can protect family assets and pass them to beneficiaries as intended.

Are Revocable and Irrevocable Trusts Taxed Differently?

Revocable and irrevocable trusts are taxed differently, a crucial consideration in estate planning. In a revocable trust, the trust creator retains control of the trust assets. So, any money the trust generates is considered personal income and taxed accordingly. The trust’s assets are also included in the grantor’s taxable estate after their death, meaning federal estate taxes apply. (Arizona doesn’t have estate or inheritance taxes at the state level.)

In contrast, assets in an irrevocable trust are not included in the grantor’s taxable estate because they are not under the grantor’s control. Also, irrevocable trusts are considered separate tax entities and are taxed at trust income rates, which can be higher than personal rates. Proper estate planning can help minimize tax burdens for both types of trusts and allow you to prepare for estate tax implications.

Contact an Arizona Estate Planning Attorney

Are you interested in setting up a trust and want help deciding which is right for you? The estate planning attorneys of Mushkatel, Gobbato & Kile, P.L.L.C., will gladly review your estate to identify which tool best suits your needs. Contact us now for a consultation.

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